Month: January 2008

One of the reasons, some market experts believe, for the monster selloff yesterday (and future selloffs down the road) was a concern that the large 're-insurers” of mortgages were having their credit rating downgraded.

One of those is Ambac Financial Group Inc. of New York. Here's how it Ambac fits into the ecosystem:

When a bank lends you money for a house, it buys insurance in case you default and it can’t get back all of its money even if it seizes your house.  So, in this way, the bank gets its money back either from you or the insurance company or a combination of both.

The bank's insurance company wants to hedge its bets, too, and so it buys insurance from another, bigger insurance company in case all of its bank customers have trouble at once.

This other, bigger insurance company is Ambac and others like it. It insures insurers.

If Ambac's credit rating falls, it cannot backstop the insurance companies who are backstopping the banks who are dealing with defaulting mortgagees.

With banks losing money to defaulting mortgagees and unable to get decent insurance to spread their risk around, banks have a serious capital problem. Their solution: stop lending money to anyone. And with that, the whole bloody system comes to a grinding halt.

This is a big problem – a way bigger problem than a mere recession.

This morning, Ambac announced its financial results for the fourth quarter 2007. Ambac lost $3.2-billion.

Wow.

The morning after I reported on yesterday’s stock market carnage, there have been a few developments. The U.S. Federal Reserve surprised some by cutting its key interest rate by 75 basis points. The Bank of Canada cut, too, but while some thought it ought to be aggressive as well and cut by 50 points, it only cut by 25 points.

As I write this in mid-morning, stocks in Canada are up quite nicely — the S&P/TSX Composite Index is up nearly 350 points — while American markets are already recovering. The Dow Jones Industrial Average plunged nearly 450 points at its open but now it’s down by less than a 100 points.

Here’s some excerpts from reacion I’ve received this morning:

• “The Bank (of Canada) signalled that more rate cuts are coming,” says BMO Nesbitt Burns’ senior economist Michael Gregory, who notes that this is Governor David Dodge’s last rate cut announcement. Mark Carney takes over as governor before the next scheduled rate announcement on March 4. “Canadian rates are headed lower. With the fed funds target rate on a fast train to 2% (consistent with past Fed policy responses to recession), the Bank of Canada will likely cut its policy rate to 3%. Indeed, given that economic and financial market conditions will probably continue to deteriorate between now and the next policy announcement on March 4, you can’t rule out an eventual 50 pointer.”
• “We have clearly underestimated the impact that the subprime mortgage market has had on equity valuations and the broad and growing threat that it now poses to financial market disintermediation,” said CIBC Capital Markets Chief Economist Jeff Rubin. “While default rates on subprime mortgages in the US are still unlikely to reach the 50% rate implied by credit default swaps, cumulative default rates may still rise high enough that, coupled with further housing market price declines, they will fuel growing anxiety over the health of the American financial system.
  “We see a mid-year low of 11,000 followed by a spirited 2,000 point recovery over the second half of the year as central bank easing and a gradual reduction in subprime mortgage refinancings allows the index to climb back to the 13,000 mark by year-end. With the subprime mortgage issue largely behind markets in 2009, and still strong growth in overseas economies, an energy and resource-based TSX should be in position to rally further in 2009.
  As a result of these revised targets for the TSX and interest rates we are moving nine percentage points of weighting from stocks to bonds. While our new index weighting in equities is still vulnerable to shortterm corrections in North American stock markets, it reflects our longer-term optimism about both global energy and resource markets,” Rubin said.
• “Today, the Federal Reserve was forced to cut its key federal funds rate by three quarters of a percentage point, to 3.5 percent, to calm global stock markets, as investors adjusted anew to the long-term structural weaknesses in the U.S. economy, particularly in consumer spending and in the housing and mortgage markets,” wrote Christian Weller, a senior fellow at Washington, D.C. think tank Center For American Progress. “What sparked Monday’s stock market sell off, however, was investors’ lack of confidence in President Bush’s grasp of the depth of the problem. His proposed $145 billion economic stimulus package is not targeted enough to get the biggest bang for the buck from the sizeable spending increase he proposed, and it does not include an answer to the threat of sharply lower house prices.”
• “The question for investors is “what next?”, says Andrew Pyle of ScotiaMcLeod.  “I believe that this quarter will mark the bottom of the equity correction.  The Canadian call is a little tougher, not simply because the BoC is conducting policy by looking in the rearview mirror, but because it will take time for lower rates to work through U.S. demand and finally show up here.  With the exception of CDN financials, I still think things are going to be rough on the TSX (especially if  oil and commodities continue to erode, which they should if the world is slowing down).”
• “Today’s release points to additional rate cuts ahead by the Bank [of Canada] especially if the US economy remains under downward pressure,” says Dawn Desjardins, senior economist at the Royal Bank. “Our baseline forecast is that the Bank will lower the overnight rate by another 50 basis points over the next couple of meetings with the risk of more aggressive rates cuts if the US situation continues to deteriorate.”

 

Former Liberal deputy prime minister John Manley today presented his panel’s report on Afghanistan to Prime Minister Harper. From the panel’s press release:

“We owe it to the Afghans, to our allies and to our own future security needs to give this mission every possible chance to succeed,” says John Manley, Chair of the Panel. “What is evident is that the commitment to Afghanistan made by successive Canadian governments has not yet been completed. The ultimate objective is to enable the Afghans to manage their own security.”

The Independent Panel says Canada's military mission in southern Afghanistan should be extended beyond February 2009, provided two key conditions are met:

1. That a new battle group is deployed by International Security Assistance Force (ISAF) partners to Kandahar province, enabling Canadian forces to accelerate training of the Afghan National Army; and

2. That the Government secure by February 2009 at the latest new, medium-lift helicopters and high-performance unmanned aerial vehicles (UAVs).

If these conditions are not met, the Independent Panel urges the government to notify Afghan and allied governments that Canada intends to transfer responsibility for security in Kandahar.

The Panel also recommends a new diplomatic push by Canada to ensure that the international effort to help Afghans rebuild their country and reconcile their differences is better coordinated and produces measurable results. The report calls on the Prime Minister to personally take charge of this diplomatic effort.

Prime Minister Harper’s response: ““Over the coming days, our government will thoroughly review the recommendations with Cabinet and our Caucus before coming forward with our response.”

Liberal Stephane Dion, speaking from Kitchener, Ont. where the Liberal national caucus was meeting:

“We need to look at it — it’s 90 pages — I was in the caucus. We’ll look at that and we’ll react. It would not be responsible for me to react now.”

We want the combat mission to end in February 2009 and Canada to continue with another mission in Afghanistan. We want to focus on development. We’ll see what Mr. Manley and his group are proposing. It’s time for Canada to do something else in Afghanistan.

Independent policy group The Senlis Council, whose analysts live and work in Afghanistan, like Manley’s idea that there should be no fixed date for withdrawal of Canadian troops and they say the government should divert whatever money the Canadian Internatioanl Development Agency is getting in Afghanistan’s war zones to the Canadian military:

“Withdrawal from Afghanistan based on a specific calendar date simply isn’t a viable option,” said Almas Bawar Zakhilwal, Canadian Country Director of The Senlis Council. “We have to stay until the job is done. Until there is peace and prosperity in Kandahar, we would be failing the Afghan people and the future security of Canadians if we were to leave. Instead, any withdrawal date should be based on a number of measures of success and not a timeline.” …

 “Like us, The Manley Panel has seen that the humanitarian situation in Kandahar is becoming increasingly desperate and that CIDA has failed in providing food aid to the deeply impoverished rural communities,” he said. “We feel that the Panel could have gone a step further in recommending that the military should be empowered to ensure the delivery of food and medical aid in Kandahar. This would be a wonderful opportunity for the troops to win over the local people, putting them in a positive relationship with the villages and a less hostile environment to fight the insurgency in.”

The Australian Air Force this week took delivery Friday of its fourth and final Boeing C-17 Globemaster (left), the very same plane that the Canadian Air Force is buying:

Just two years after Australia decided to purchase four Globemasters for the heavy air lift role, the accelerated acquisition program has delivered the giant aircraft on time and on budget . . .

. . . The C-17 project’s (AUS)$2.2 billion budget includes the construction of permanent facilities for Number 36 Squadron and its support agencies at RAAF Base Amberley. The project also includes significant improvements to Air Movements facilities at RAAF Bases Darwin, Townsville, Edinburgh and Pearce.

Canada has already taken delivery of 2 of its 4 C-17s. They will be based at CFB Trenton, Ont., where, according to a senior DND official I had a briefing with this week, there are a forest of cranes busily constructing new facilities for the C-17 and the 17 new C-130Js that will be arriving over the next few years.

DND sources, incidentally, indicate that the planes Canada received were in close to perfect shape. Upon delivery, each of the planes we’ve received were given a Category 2 rating which, per the terms of the contract, means “The airplane exhibits one or more deficiencies”.” DND officials are foribidden to tell me what those deficiences are — trade secrets and/or national security and alll — but they say they are very minor in nature. The government held back less than one-quarter of one per cent of the value of the contract or about $1.25–million per plane.

In its release highlighting the delivery, Boeing takes stock of the worldwide fleet of C-17s and gets in a not-so-subtle jab at U.S. lawmakers to keep the orders coming for more C-17s:

…. the worldwide C-17 fleet now includes 171 U.S. Air Force C-17s as well as four in the UK Royal Air Force (RAF) and two in the Canadian Forces. The RAF and the Canadian Forces each will receive two additional C-17s this year. The U.S. Air Force is on contract to receive 19 additional C-17s by mid-2009.

…Today's delivery leaves just 23 C-17s remaining on the production schedule. Without additional orders, the C-17 line will close in late 2009. Despite significant evidence of increasing airlift needs, the U.S. Air Force has not budgeted for additional C-17s the last two years, forcing congressional plus-ups to meet the needed requirement.

First, U.S. Defence Secretary Robert Gates had to mend fences here after he seemed to criticize Canadian troops in Afghanistan. Now, Foreign Affairs Minister Maxime Bernier is paying back the favour, mending fences with the U.S. after we reported on Wednesday night that Canadian diplomats had a “Torture Awareness” training manual that listed the United States and Israel along with Syria, Iran, China and others as states that employ torture or illegal  interrogation techniques.

Bernier’s office issued this statement this afternoon:

“I regret the embarrassment caused by the public disclosure of the manual used in the department’s torture awareness training. It contains a list that wrongly includes some of our closest allies. I have directed that the manual be reviewed and rewritten. The manual is neither a policy document nor a statement of policy. As such, it does not convey the Government’s views or positions.”

I just came back from the House of Commons foyer where I was taping a segment for broadcast this weekend on CTV Ottawa and noticed that the Commons was filled with university students from Queen’s University in Kingston, holding what is, I understand, a model  Parliament.

As I peeked in, I couldn’t help but notice that the Speaker of the House for the day’s session was none other than Green Party leader Elizabeth May — perhaps getting some a taste of what she hopes will be full-time occupancy in that chamber.

Maclean’s Ottawa gadfly Kady O’Malley also got a chance to be Speaker for a few hours, before being replaced by some guy named John Baird, and she’s got a great post about presiding over a mock emergency debate on the Chalk River shutdown:

During my hour of ultimate parliamentary power, I recognized members, ruled on points of orders, said 'Order, order,' while giving the whole room my best 'watch it' face, and generally had the time of my life. I even got to preside over a vote. All told, by the time my replacement — a jovial fellow by the name of John Baird — showed up to take my spot, I wasn't remotely ready to hand over the robes. If only there was some way to become Speaker without going through all that bother of being elected to the House of Commons, it would totally be my dream job.

Liberal leader Stephane Dion made his ill-advised comments Wednesday in Quebec City. We reported them on our national newscast that night. The Prime Minister and the Pakistan high commissioner reacted to them Thursday. Now, in what is beginning to look like piling on — perhaps in order to keep voter attention away from the AECL-Lunn controversies of earlier this week — Foreign Affairs Minister Maxime Bernier takes this shot at Dion, in the form of a letter to the Pakistanis:

His Excellency Musa Javed Chohan
High Commissioner for the Islamic Republic of Pakistan
10 Range Road
Ottawa, Ontario
K1N 8J3

Excellency:

 Let me begin by noting once again that Canada greatly appreciates Pakistan's contribution to the fight against terrorism and extends our sympathy for the losses that your country has endured.  Canada will
continue to work with Pakistani and Afghan officials to improve the management of your shared border.

 I believe it is necessary for me to reaffirm Canada's position at this time  due to recent remarks made by the Leader of the Official Opposition which do not reflect the views of the Government. 

I regret if the remarks in question have caused any consternation. Once again, I assure you that our policy remains consistent.

      Sincerely,

Maxime Bernier
Minister of Foreign Affairs

Of course, to Dion’s credit, he has no qualms in facing an unscripted scrum of reporters. Can’t say the same for Bernier. His scrums have been few and far between in the Foreign Affairs portfolio and, forgetting for a moment the dubious proposal of sending NATO troops into Pakistan that Dion hinted at, many Canadians might like to get a little more information from Bernier about what he and his department diplomatically to pressure the Pakistanis to lock down their border with Aghanistan.

 

Here are the lines the Opposition Leader’s Office (OLO) is sending out in the wake of the brushback from Pakistan, the Prime Minister, and others to a comment made earlier this week in Quebec City in which Liberal Leader Stephane Dion made it sound an awful lot like NATO ought to consider sending troops into Pakistan if that country can’t secure its border with Afghanistan:

Contrary to the erroneous claim and distortions of Mr. Harper and the Conservatives, in a press conference in Quebec City yesterday the Liberal leader did not propose a military intervention in Pakistan. Mr. Dion obviously did not propose any sort of military intervention. Mr. Dion believes that Canada must focus our diplomatic efforts on Pakistan in order to secure the border with Afghanistan. 

There can be no doubt that one of the single biggest factors in the ongoing struggle for security and stability in Afghanistan is the border with Pakistan.  During the recent visit to Afghanistan by Mr. Dion and deputy leader Michael Ignatieff, they heard time and again that a major impediment to improving the security of Afghanistan is the existence of Taliban training centres across the border in Pakistan. The location of these centres are known according to Afghan authorities. Canada must not only diplomatically intervene with Pakistan to convince them to take necessary action to shut down these centres and stop the flow of insurgent personnel and equipment across the border, we must also put pressure on our NATO allies to make this issue a priority in their own bilateral dealings with Pakistan.

It is incumbent upon Canada, in close collaboration with our NATO allies, to pressure Pakistan to deal seriously and swiftly with these Taliban centres if we truly want to see an improved security situation in Afghanistan. Canada will need to take its diplomatic efforts more seriously than the Conservative government seems to deem necessary.

 

Earlier this week at the North American International Auto Show in Detroit, I reported on the activities of Chinese car makers eager to crack the North American market. China had four car makers and an importer at the show including Chamco (that’s its SUV, right), BYD, Changfeng and Geely.

Today, in his monthly auto report, Scotia Capital economist and auto specialist Carlos Gomes has this to say about China’s domestic market:

China has been the fastest-growing auto market over the past decade, with sales surging ten-fold to more than 5.0 million units in 2007. Growth has been driven by rapid economic expansion and increasing wealth — double-digit average wage gains over the past decade and more than a three-fold surge in equity markets. Despite this rapid growth, vehicle penetration remains very low at only 27 vehicles per thousand people, compared with a G7 average of 610. With a population of 1.3 billion people and a vehicle fleet of only 35 million, China will continue to experience rapid growth.

While car sales gains moderated to 22% in 2007 and will likely increase by 15% in 2008 to 5.9 million units, China is on target to overtake the United States and become the largest automotive market by roughly 2020. Young people are increasingly becoming an important group of car buyers in China. The average age of car owners dropped to 32 years old in 2006, four years less than in 2005. Surveys indicate that the 25-29 year-old age group accounts for the largest portion of potential car buyers in China, while those between the ages of 18 to 25 already represent more than 11% of overall purchases. With about 200 million people in the 20-29 age group and nearly 120 million in the 15-19 age group, long-term demand growth is assured.

Gomes also has a bleak forecast for the North American car market

U.S. SALES TO SLUMP TO A THIRTEEN-YEAR LOW
Weak first-half vehicle sales will pull full-year 2008 U.S. volumes down to 15.0 million units — the lowest level since 1995 — from an average of 16.6 million over the past 5 years. The fall-off reflects the changing economic environment facing Americans, with purchasing power and confidence undercut by the housing-led slowdown, declining home prices and equity values, as well as moderating job and income gains. High gasoline and interest costs are also cutting into disposable income and discretionary purchases. Estimates suggest that energy and interest expenses now absorb a record 26% of U.S. household disposable income, up from an average 22% during the previous decade, leaving less room for discretionary purchases.

Canadian vehicle sales are expected to soften to 1.61 million units in 2008 from 1.65 million last year, with the slowdown concentrated in Canada’s manufacturing heartland — Ontario and Quebec. Weaker U.S. growth, a strong Canadian dollar and slowing exports will undercut employment growth in Central Canada, dampening vehicle demand.

I was born in Montreal, but grew up mostly in Guelph, Ontario — an hour's drive or so from Buffalo. And, so, by luck of geography, I became a Buffalo Bills fan back in the 1980s. I still am. I'm stickin' by them.

But now, I find that Tom Dimitroff, who played for my other favourite team — the University of Guelph Gryphons — and whose older brother Randy (another Gryphon football alum) was my colleague at my other favourite job at The Bullring, is now the new general manager of the NFL's Atlanta Falcons. Right on, Tommy!

At Guelph, I remember Tom as a hard-hitting safety with a smile a mile wide.

Now, when it comes to NFC teams, I've been a Packer fan since back in the days before Favre joined the team. But with Dimitroff running the show in Atlanta, I've got a new team to cheer for. Good luck, Mr. D!